Voice over Wi-Fi and the Implications for MNOs

As Apple unveils the iPhone 6 featuring Wi-Fi calling and texting and T-Mobile US immediately puts it into practice, changes are on the horizon for MNOs. A recent analysis of data traffic in the US has shown that over 50% of mobile communications are now carried over a Wi-Fi connection, whilst the rest travel over a cellular network. Whereas indoor Wi-Fi networks were once predominantly confined to homes and offices, they are today becoming increasingly commonplace in public spaces such as retail centres, transport networks and even city centres.

As we go about our day-to-day lives currently, we switch between Wi-Fi and cellular networks when we move from one location to another – perhaps meaning that we are out of Wi-Fi coverage for fewer than 30 minutes a day. If voice over Wi-Fi becomes mainstream, it poses the question of whether many users would want to incur the cost of mobile subscription when they will be able to make calls in numerous Wi-Fi hotspots.

The increased use of indoor Wi-Fi networks has reduced the attraction for MNOs to roll out radio networks in buildings, and seems to have already killed the unborn market of picocells for home coverage. Most of the Wi-Fi -covered venues also have a cellular infrastructure to assure the transport of legacy voice and SMS traffic. With the development of Wi-Fi infrastructure using the latest 802.11 ac wireless networking standard and delivering up to 433 Mbits, mobile operators are now postponing their decision to roll out small LTE cells in the same venues and are increasingly thinking of offloading the cellular traffic to the Wi-Fi network.

This decision by operators not to invest in indoor LTE infrastructure might then prove unwise. A shift to Wi-Fi as a means of carrying data traffic could well result in revenue loss, and may force them to make drastic changes to their business models which are, in essence, made up of investments in a network that is then sold in pieces to subscribers. If this model is to be challenged and potentially overtaken by the introduction of a wide range of mobile communication services over Wi-Fi, MNOs will need to take steps in order to protect their position.

By Philippe Berard, Consultant at Coleago Consulting

Elimination of EU roaming charges implies a move towards regulated wholesale rates

On the 3^rd of April 2014 the European Parliament voted (with some amendments) to adopt the Commission’s proposal to end roaming charges in the EU by the end of 2015. This was part of a wider vote in support of the Commission’s proposed regulation for a “Connected Continent”, the term used for the telecoms single market. The regulation must be approved by parliament and the European Council. With this, the Commission also moved a step closer to regulated wholesale prices and hence the structural separation of mobile networks into NetCos and RetailCos.

In essence the Commission wants EU consumers be able to use their mobile phone within all EU countries in the same manner as they would at home. “…Further reforms in the field of roaming should give users the confidence to stay connected when they travel in the Union without being subject to additional charges over and above the tariffs which they pay in the Member State where their contract was concluded.”

However, the problem with this is that most consumers chose domestic tariff plans with bundled minutes and data plans, so that within the bundle the incremental cost of usage for consumers is nil. Selling bundles also makes sense from a mobile operator’s perspective because most costs are fixed. In contrast, in a roaming situation an operator’s costs (the wholesale rate an operator has to pay to the visited network) are proportional to usage – i.e. variable. The Commission and the Parliament appear to be aware of this problem, and the adopted text states that operators “may, notwithstanding the abolition of retail roaming charges by 15 December 2015, apply a “fair use clause” to the consumption of regulated retail roaming services provided at the applicable domestic price level, by reference to fair use criteria. These criteria should be applied in such a way that consumers are in a position to confidently replicate the typical domestic consumption pattern associated with their respective domestic retail packages while periodically travelling within the Union.”

Much will depend on how the “fair use clause” is written. If we take at face value the text “consumers are in a position to confidently replicate the typical domestic consumption pattern associated with their respective domestic retail packages while periodically travelling within the Union”, this may mean that customers on large minute and data bundles can use these freely at any time across the EU. Alternatively the EU would have to define what “periodically travelling within the Union” means. Does it mean 30 days a year, or 180 days, or how much? Assuming the Commission does not want to place limits on how much Connected Continent consumers are allowed per year, there will be no time limits. Taken to an extreme, a mobile user could shop around for the cheapest SIM-only deal in Europe regardless of his or her country of residence. A prime example is EU parliamentarians who shuttle between their home country, Strasbourg, Luxembourg and Brussels.

The fair use provision is designed to address the problem that it is ultimately impossible to regulate retail prices without regulating wholesale prices. The Commission appears to be aware of the difficulty in defining “fair usage” and the implication for operators’ margins. The adopted text states: “In addition, the Commission should by 30 June 2015, in advance of that final abolition of retail surcharges, report on any necessary changes to the wholesale rates or wholesale market mechanisms, taking into account also mobile termination rates (MTR) applicable to roaming throughout the Union.” This is the real bombshell because it heralds EU regulation of wholesale prices.  In the same way as the EU has driven the regulation towards lower MTRs this may happen to wholesale prices.  The target might be a Reference Wholesale Access Offer, for example with the €0.002 per Mbyte of data rate imposed on Hutchison 3 Austria to allow their acquisition of Orange Austria to go ahead.

In regulating mobile tariffs, the EU is focusing only on roaming charges, whereas international call pricing is also highly unbalanced. In most cases international calls are not included in a mobile minute bundle and charged at a premium. This leads to oddities. For example, for a UK mobile subscriber with a bundled minute plan the incremental cost of a call to a UK mobile numbers is nil. Hence for a call to a UK number that is roaming in Poland, the marginal cost to the caller is nil and, according to the EU roaming charges cap, the called party pays no more than €0.07 per minute to receive the call. The marginal revenue to the UK operator is €0.07 per minute. However, if a UK mobile user calls a Polish mobile number the price paid is substantially higher. For example, Vodafone’s standard to Europe call price is £1 a minute (€1.20). In other words, Vodafone’s incremental revenue is 17 times higher, although costs are the same.

The Commission also proposed that for European fixed calls “operators will have to charge no more than a domestic long-distance call for all fixed line calls to other EU member states. Any extra costs have to be objectively justified.”  Will the same principle be applied to mobile operators? If yes, the scenario where a consumer buys a SIM in one country and uses it in another becomes practical. In this scenario, where within the EU distance and geography no longer matter for mobile retail prices, the retail activity of a mobile operator might evolve into what is in effect a pan-European MVNO with an “always best connected” value proposition, regardless of the access network used. Under these circumstances, who will then want to bid for spectrum and invest in networks?

Either way, we are moving to a situation where the EU mobile industry is subject to extensive price regulation. And yet, the EU Directorate General for Competition is totally focussed on preserving competition at network level and in-country consolidation of mobile operators is hard to achieve. This makes little sense. Now that the cost of calling has come down, perhaps Neelie Kroes can afford to make a call to Joaquín Almunia (Vice President of the European Commission responsible for Competition Policy) and attempt to sync policies.

Written by Stefan Zehle, CEO, Coleago Consulting

Could mobile operators become the prime real estate landlords for the digital economy?

Finally it is here: The mobile data equivalent of toll-free numbers. Last week AT&T unveiled a “Sponsored Data service”, meaning that their customers are able to use participating services without eating in to their data allowance. AT&T will treat Sponsored Data traffic no differently to regular data traffic, thus providing digital retailers and OTT service providers with an efficient way to communicate and trade with their customers.

Coleago has long argued that with the growth in the digital economy, sellers of physical and digital goods and services are looking for the mobile data equivalent of a toll-free number. In the past many businesses encouraged consumers to trade with them over the phone by publishing toll-free numbers. The growth of online shopping with mobile devices provides impetus for extending the concept to mobile data. The message from retailers to consumers is “it does not cost you anything to visit our digital store”.

The good news for mobile operators is that this provides an additional revenue stream. But the concept could be taken further. In Europe, North America and other markets where most people purchase their smartphone from mobile operators, these operators can control what consumers see on the screen of their new smartphone when they take it out of the box and switch it on. A smartphone screen provides the digital real estate for sponsored apps.  Apps placed on the home screen would be the most valuable, and the giants of ecommerce such as Amazon may have the scale to pay to have their app on the home screen. EBay, travel and financial sites and many other e-tailers may also be interested in sponsoring apps placed on subsequent screens.

Of course users can delete and move smartphone apps. However, judging by how many people do not bother or do not understand how to change their browser home page, it is likely that many of the preloaded apps will stay where they were first placed. This effectively means that mobile operators become landlords in the digital economy.

Written by Stefan Zehle, CEO, Coleago Consulting

Hong Kong’s hybrid approach to 3G spectrum renewal creates a “freerider” problem for the incumbents

Hong Kong’s Office of the Communications Authority (OFCA) has decided to adopt a hybrid approach to the renewal of incumbents’ 3G spectrum. OFCA will distribute two thirds of the spectrum to the incumbents through an administered allocation process and the remaining third will be put up for auction. The incumbents have the opportunity to reacquire the spectrum through the auction but it also opens up the opportunity for a new player (and many are speculating the China Mobile Hong Kong is the primary candidate) to acquire the spectrum.

When incumbents value spectrum one of the most significant sources of spectrum value attributed to spectrum in an auction is the ability to block new market entry. This “blocking value” can be very high for incumbents, especially in mature markets, as a new player seeking to win share to drive economies of scale often sparks a value destroying pricing or commission war – the experience of Three entering the UK market is a good case in point.

China Mobile may place a high strategic value on gaining access to 3G spectrum in Hong Kong and so the cost of blocking in the auction could be high. All the incumbents have an incentive to block new market entry. However, in an ideal world an incumbent would prefer “freeride” and rely on another incumbent to pay any premium for market entry. This creates a coordination problem for the incumbents and this risk is that they fail to “reach agreement” through their bidding strategies as to who will take the responsibility for blocking. The result may well be that new entry occurs despite all incumbents being heavily incentivised to avoid it.

Written by Graham Friend, Managing Director, Coleago Consulting

An upset in Norway following an auction of existing spectrum assets

In my article on spectrum renewal by auction, which was recently published on www.telecoms.com, I highlighted the potential risks that the Norwegian regulator, the NPT, was taking in renewing spectrum using a first price sealed bid auction. http://www.telecoms.com/197611/uncertainty-and-risk-the-results-of-spectrum-renewal-by-auction/ In the article I asked whether Norway would provide the first real upset and whether an incumbent would be deprived of key spectrum assets.

The NPT announced the results of the auction today and whilst incumbents Telenor and NetCom secured spectrum in the key 800, 900 and 1800MHz bands the other incumbent, Tele2, failed to win any spectrum at all. Tele2’s CEO, Mats Granryd made clear in the company’s press release that they regarded the auction outcome as an upset. Granryd said, “We are obviously not satisfied with the outcome of the auction, but we will continue to build on our strong position in Norway.” Instead of Tele2 securing spectrum, the mysterious Telco Data secured a robust portfolio of spectrum assets comprising 2×10MHz in the 800MHz band, 2×5MHz in the 900MHz band and 2×20MHz in the 1800MHz band.

So what contributed to this upset?

The choice of auction format is the primary candidate. In a first price sealed bid auction bidders effectively write a number down in an envelope and the highest bidders win and pay the amount they each bid. In such an auction it makes sense to bid less than the value you place on the spectrum or, as game theorists like to say “shade your bid.” The challenge, however, is to determine how much to shade your bid. Shade aggressively and if you are successful in the auction you create significant value. The risk, however, is that you shade too aggressively and someone with a lower valuation, but who shaded less aggressively, wins the spectrum.

Coleago Consulting has supported operators in over 60 spectrum auctions and we have worked on behalf of both incumbents and new entrants. As markets have matured it has become increasingly apparent that the business case for new market entry is not an attractive one and heroic assumptions are often required just to turn the business case positive. Tele2, as the smallest player in the Norwegian market, may well have taken the view that they only needed to outbid a new entrant and that a new entrant would have had a very low valuation. As a result Tele2 may have decided to shade very aggressively in the hope of securing spectrum at a low price and thus create significant value. The combination of very aggressive shading from Tele2 however and a super charged new entrant business case is likely to have generated the upset.

Written by Graham Friend, Managing Director at Coleago Consulting

Coleago join a managed services panel session

Chris Buist, Director, Coleago Consulting takes part in a managed services panel session at European Communications’ quarterly seminar.

The Data Tsunami is coming to East Africa

Coleago Consulting discusses regional investment, spectrum and infrastructure strategies at the TMT Finance & Investment East Africa 2013 Conference

This is a really critical time for the East Africa region. Significant decisions about the framework for investment, particularly regulation and spectrum allocation for 3G and 4G, will have a fantastic impact on regional growth.

There are a number of important spectrum auctions coming up across the region and operators are looking at how best to use spectrum, infrastructure sharing, new technologies and business models, to meet the massive demand for data services. The industry is now entering a transformational stage with unparalleled fixed-line and mobile consolidation.

Despite significant growth and achievements achieved over the past decade, major new investment, innovation and infrastructure roll out is needed for the next phase of development.

Highlighting the changing telecoms landscape in East Africa, next week (November 26^th) sees the first TMT Finance & Investment East Africa 2013 Conference arrive in Nairobi.

In my first conference presentation of my new role here at Coleago, I will be making a keynote on “The Data Tsunami: Spectrum Allocation and Infrastructure Sharing” at the event, discussing the actions that regulators and operators are taking to cope with the global “data tsunami” that started building with 3G and is now accelerating with 4G. If you’re attending the event, or considering it, and would be interested in meeting, feel free to contact me – chris.buist@coleago.com

Written by Chris Buist, Director, Coleago Consulting

Challenges for EU mobile operators

The European mobile telecoms industry is now at the maturity stage of the industry life cycle.  While the introduction of LTE is still a relatively recent event, there is limited revenue growth and consolidation is starting to set in. Rather than being challengers, in some ways mobile operators themselves have started to look like the old fixed line operators at the start of the telecoms market liberalisation in the 1980s.  National fixed line incumbents (PTTs) went into defensive mode as the EU’s Customer Premises Equipment directive ended their monopoly on the supply of telephones and PABX and the opening to competition of long distance and international calls forced operators into rebalancing and cost orientated pricing.  The European Commission predicted significant contributions of market growth and benefits to consumers and businesses and there is no doubt that the policy delivered this. Indeed, without the EU’s effort to push for liberalisation of telecoms markets we would not have today’s innovative mobile telecoms markets with multiple mobile operators.

Now these very mobile operators are on the defensive as the EU increases pressure to create a single telecoms market and puts its weight behind wholesale price transparency and net neutrality. Three of the statements made by Neelie Kroes, VP of the European Commission responsible for the Digital Agenda in her speech of the 9^th of July 2013 impact significantly on operators:

• —  “Blocking or throttling services isn’t just unfair and annoying for users – it’s a death sentence for innovators too. So I will guarantee net neutrality.”
• —  “European calls shouldn’t count as a costly international call; not within a true single market. …. so any difference in price must be objectively justified by additional costs.”
• —  “In a true single market, there are no artificial roaming charges. It’s irritating, it’s unfair, it belongs to the past.”

In her speech Ms Kroes also addressed the issue of cross border consolidation: “If you’re allowed to operate anywhere in Europe – authorised within an EU framework — then you should be able to operate everywhere in the EU. … Like a single authorisation system with supervision by the home member state.”

While as yet true cross border consolidation has been rare, we already witness increased consolidation within markets either outright through M&A or through RAN sharing. RAN sharing is encouraged by some regulators in order to deliver mobile broadband coverage in rural areas and better LTE speeds in a wider band. For example, the “mutualisation” of spectrum was central to the 800MHz licence award in France. Regulators are well aware of the threat to competition posed by RAN sharing but in a mobile broadband world the economics of deploying LTE in a wide band favour RAN sharing.

These factors – cost orientated pricing, net neutrality, and consolidation – will shape the European mobile industry during the coming years.  They may even lead to the unbundling of mobile access from the provision of services, just as we have seen in the fixed network. Implicit in consolidation at network level is increased price transparency at wholesale level to allow multiple operators to compete fairly at retail level. In this context the elimination of roaming charges points towards the end of the traditional Inter Operator Tariff (IOT) roaming wholesale tariffing. Possibly within the EU bureaucracy someone has already been tasked with drafting a directive that would require EU mobile operators to publish a “reference access price offer”.

Let’s imagine a future where Apple or Google obtain wholesale access (MVNO) agreements in each of the European states and, instead of replicating the national mobile operator model, launch a pan-European service where the EU is a single nation, at least in terms of mobile phone service costs. Far-fetched? Well, many consumers already make smartphone choices ahead of network choices and to many people OTT services such as Skype, FaceTime and WhatsApp matter more than traditional phone calls.  We might even see a resuscitation of the trans-Europe dialling code (+388) designated for the European Telephony Numbering Space or ETNS.

As regards separating access and service, a line of attack comes from operators such as Rebtel in Sweden and Republic Wireless in the USA. These operators use WiFi offload and “push” their customers to make calls using Skype like services.  Mobile networks are only used in an MVNO fashion when out of WiFi coverage.

Is this the nightmare scenario for traditional mobile operators, where they are relegated to perform the role of the much quoted “dumb pipe”?  Firstly there is nothing “dumb” in operating a highly sophisticated LTE network while migrating millions of users from GSM and HSPA and coping with the mobile data tsunami. Secondly the massive growth in mobile broadband requires huge investments. Investments require returns and therefore it is the pipe where returns will be earned.

This scenario may actually be rather benign for investors in the mobile industry. Rather than fighting subsidy wars, being played off against each other by Apple, and driving up prices in spectrum auctions, operators could get on with building a superb mobile broadband infrastructure in an environment that allows investors to earn stable returns. After all, in the history of the European mobile industry the greatest decline in return on capital employed resulted from the 3G auctions in 1999 – 2002. Let others go crazy!  Investors who are attracted to stable returns would continue to invest in mobile network operators whereas those who seek a higher risk / return profile would invest in companies that provide services over these networks.

What has been the reaction of the mobile operators to threat to roaming and international call margins?  Some claimed that the loss of margin from roaming would lead to price increases elsewhere.   Yes, it probably would i.e. prices would become more cost orientated. This is not necessarily a bad thing for the mobile industry.

As the market is opened up and access is unbundled from other value chain activities, this provides an opportunity for new competitors. Operators such as Lebara and Lyca had some success in competing on the basis of low cost international calls from mobile phones. MVNOs such as Truphone, WoldSIM, roamline.com arbitrage the difference between wholesale and retail prices to deliver cheap roaming. Mobile operators watch these trends carefully and will not make general price cuts on high margin services if this reduces overall profits. They are responding in smart ways by offering low cost roaming to those who seek it. For example, EE of the UK which focusses on LTE offers “inclusive unlimited roaming minutes and texts for an extra £5 a month on a 24 month roaming plan”. Here we can see the future of roaming tariffs. The bigger threat is to those niche operators because their arbitrage opportunity reduces.

In response to lower intra-EU roaming charges some operators increased roaming prices outside Europe, but not in a cost orientated manner.  Most operators are wedded to a zonal pricing approach, pretending that somehow costs increase with distance. That’s nonsense.  Some of the highest Inter Operator Tariffs are levied close to Europe. For example, Tunisian mobile operators collude to set wholesale roaming prices as high as €1.50 per minute. While a European operator’s retail price for roaming in Tunisia of €2 per minute including VAT might seem high, it barely covers the wholesale cost. In some other markets much lower wholesale roaming prices can be obtained. This is also evident from the countries covered by EE’s unlimited international roaming deal which includes Europe and an odd mixture of countries including Australia, the US, Peru, Turkey, etc.

And what about the subsidised contract customer, i.e. the customer supposedly “owned” by the operator? After all the separation of handset and SIM was one of the great innovations of GSM because of its potential for increased competition. It is not necessarily the case that a customer life time value is higher for a consumer with an operator provided subsidised smartphone compared to a SIM only smartphone customer with a 30 day rolling contract.

Operators are aware of these trends and their offers are evolving in a segmented response to changes in the regulatory and competitive environment. There may be bumps along the road, but I am optimistic for the future of the mobile industry as a sector worth investing in.

Written by Stefan Zehle, CEO Coleago Consulting

Misguided approach to EU intervention on roaming charges

In her speech on the 9 July 2013, Neelie Kroes, Vice-President of the European Commission responsible for the Digital Agenda, reiterated her assault on roaming charges within the EU. There is talk of regulatory intervention to eliminate roaming charges within the EU.

While mobile operators may earn good margins on roaming, a mandated elimination of roaming charges is ill conceived because mobile operators in different EU countries face different costs. One of the most significant investments made by mobile operators is in buying spectrum.  For example, for the 800MHz digital dividend spectrum, operators in Denmark paid €0.30 per MHz per head of population (€/MHz/pop) whereas in France, operators paid €0.67/MHz/pop i.e. 123% more.  Some cash strapped EU countries set high reserve prices for spectrum €0.58/ MHz/pop in Italy vs. €0.10/MHz/pop in Denmark. Coupled with differences in deploying 4G LTE coverage, this translates into hundreds of million euro differences in capex.

Furthermore there are significant differences in the timing of spectrum allocations and hence the deployment of LTE which translates into huge cost differences for mobile data. Assuming investors like to earn similar returns, these cost differences will result in different wholesale and retail prices. Therefore it does not make sense to mandate the same retail prices regardless of the country in which the traffic occurs.

If the EU and its member countries are really so keen on a single telecoms market, why not start by allowing operators regardless of their country of operation to select a national telecoms regulator of their choice to regulate them.  I suspect the Danish regulator would attract quite a few “customers” whereas the Italian and Greek regulators might go out of business. The resulting reduction in regulatory costs could be passed on consumers in form of lower retail prices.

Written by Stefan Zehle, CEO, Coleago Consulting

How much is in a Gigabyte? – or the not so broad-band experience

The ordinary broadband user does not grasp the concept of “Gigabyte per month”, despite many years of educational efforts by operators around the world. A typical operator illustration looks like this: for one Gigabyte you can get x (low single digits number) hours of video, or y (double-digit number) hours of music, or z-thousands of (not too high-resolution) photo messages. The often advertised promise of high-definition video on the go and the actual reality of limited data packages are usually far apart.

A friend, who recently moved to a farm house in the country side complained to me: I cannot get any fixed-line service here and while my 3G mobile connection works fine, my data is used up within 3 days – so for the rest of the month, I’m left with chatting on whatsapp.

An illustration of what happens here: In most European countries the average person consumes around 4 hours of TV per day. Bringing this experience to an IP world translates into an astonishing data volume of 1 Terabyte (or 1000 Gigabyte) per month (assuming high-definition video). This is far from any current mobile data package and even far from the newly data-limited DSL packages of Deutsche Telekom, which offer a maximum data allowance of 75GB at entry level and 400GB at the highest package. So, even this highest package would cut you off in less than half a month, if you were to bring all your average TV consumption to the Internet.

There is still a long way to go until an all-IP world can become reality.

Written by Matt Halfmann, Partner, Coleago Consulting